Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Rep. Paul Ryan, Chairman of the House Budget Committee, tonight on "The Kudlow Report" (M-F, 7-8PM ET).

All references must be sourced to CNBC.

LARRY KUDLOW: We welcome back to The Kudlow Report, budget chairman and House member -Paul Ryan. Nice to see you again. It's a pleasure. Haven't been seeing-- haven't seen you in awhile--

PAUL RYAN: It has been. It's great-- great to be back.

LARRY KUDLOW: All right, let me just ask you-- about this whole budget business, which is what everyone's preoccupied with. I thought the biggest bombshell in your budget was the fact that you called for repeal of Obamacare, which most people would say is the law of the land. It passed muster with the Supreme Court. It was an election issue. Obama won the election. And you want to repeal it in your budget. Tell me why you went there?

PAUL RYAN: So-- you think we should just give up our principles when we put out our budget vision? I mean, that's what I ask people who say, "Why did you repeal Obamacare?" First of all, we think it's a terrible law. Second of all, this law has yet to be fully implemented. There's a lot left to go here. And we think as people see the ugly details unfold, we believe this law will collapse under its own weight for lots of reasons.

And we believe in a patient-centered health care system, not a government-run health care system. And that's why in this budget we articulate we want to replace Obamacare with a patient-centered health care system. And that's why we're calling for its repeal. And by the way, it's about $1.8 trillion in borrowed money it calls for spending over the next 10 years, which is money we don't have.

LARRY KUDLOW: Is that a plug in your budget, though? You've got-- you've got a 10-year balanced budget. How much of that comes from repealing-- Obamacare? What do you make on that?

PAUL RYAN: Well, some of it clearly does come from repealing Obamacare, because it's spending money that we haven't spent yet. It's programs that haven't been up and running yet that we can't afford, because they break the budget. And it's about $1.8 trillion of Obamacare spending that occurs that we propose to get rid of. But at the same time, we think we can actually meet the mission of health and retirement security for Americans without doing all of this--

PAUL RYAN: --government take over.

LARRY KUDLOW: But in terms of your budget, it -- if you don't get it this year, the likelihood of getting repealed this year is very, very, very low. Does it blow a hole in your 10-year budget?

PAUL RYAN: Sure, it blows a hole in your budget, because it's-- it calls for continuing the spending. But what is a budget? A budget is our vision for how we should fix this country's fiscal problems. And a key part of that vision is we don't take over-- have a government takeover of health care. We also think Obamacare's going to do great damage to Medicare. This new independent-- payment advisory board. The-- the IPAB, the 16 people that are going to run this-- this panel, we think that's going to lead to health care rationing.

We believe premium support is a far better way to go. Give the patient the choice of plans that meets her benefit, her needs, not this board of bureaucrats that the president's going to appoint. So on all the big issues, we are showing what we think is the best way to fix our fiscal problems. And let me just make one--

LARRY KUDLOW: --policy. Essentially, it's a policy statement is what you're saying. You're renewing, you're reinvigorating a Republican policy statement. But let me ask you this. And a lot of people have raised this in the last-- 48 hours, since you broke this story. Does this…interfere with a possible compromise with the White House? Are you kind of putting a stick in the president's eye? You had lunch with him. Did you tell him at lunch that you were going to call for repeal of Obamacare?

PAUL RYAN: He knows exactly the kind of budget we were going to come up with. I gave him-- I gave him more or less the kind of budget we were going to come up with. And let me put it this way, just ask a person who's watching this show who's in business. Do you start with your last offer first in a negotiation? No, of course not.

What we are doing with this budget is articulating what we believe is the best policy forward to grow the economy. Balancing the budget is not an end in and of itself. It's a means to an end. And the means we're trying to get to is a pro-growth economy. It's helping people out. It's reviving upward mobility and growth and opportunity in this country and this economy.

So that's what doing this does. So at the end of the day, where I actually see something different happening here. We're passing a budget. It looks very similar to last year's budget. But the Senate's actually going to do a budget this year. They haven't done one for four years. That's a good thing. Now I don't really-- I'm not a fan of their budget. It doesn't ever balance the budget. It calls for another trillion dollars of tax increases on top of all that happened already. But at least they're doing a budget, which gives us the process, a budget process, through which, at the end of the day, hopefully be-- we can get an agreement.

LARRY KUDLOW: But coming back to the White House this year. Okay, so they issued a kind of broadside against you today. This may all be--

PAUL RYAN: Kind of used to that.

LARRY KUDLOW: This is a ritual. This is all pro forma. They said you have tax cuts for the rich. They say you're taking down Medicare. They accuse of using vouchers. But at the end, they did say that the-- president would be willing to work with Republicans. We've had this charm offensive by-- President Obama. Let me ask you. Do you believe a grand design, including spending, entitlements and tax reform is a good thing, could be achievable, and should be done?

PAUL RYAN: I do think it's a good thing. I do think it's achievable. And I do think it should be done. The question from our perspective is, "Was this so-called charm offensive a one-off event? Or was it a new posture, a new conversion that's to continue?" If the president goes back out on the campaign trail and starts campaigning again, then it will send a signal that he's really not serious about actually bridging the gap.

LARRY KUDLOW: But what do you think? What do you think? That's a real--

PAUL RYAN: I don't know. I honestly don't know the answer to the question.

LARRY KUDLOW: The Wall Street Journal editorial page says--

PAUL RYAN: I don't know.

BOTH: --"Trust but verify."

PAUL RYAN: I think that's basically the attitude I have.

LARRY KUDLOW: He's up here on the Hill today. He'll be up here on the Hill tomorrow, I think, meeting with Republicans. He's doing a lot of work here. What do you think? Has something changed here?

PAUL RYAN: It's the first time in over four years that we've seen this kind of posture. So like you said, it's trust but verify. This is the first time I ever had the opportunity to actually have a conversation with the president about the budget. This is the seventh budget I've written. Four of them were with President Obama. And this is the first conversation I've ever really had about-- the budget, other than that which has--

LARRY KUDLOW: And how was it?

PAUL RYAN: --been televised.

LARRY KUDLOW: Where-- when you spoke with him at lunch-- you and Van Hollen spoke with him at lunch. Okay, so how did you deal with the disagreements? You see tax reform differently than he sees tax reform. You see entitlement reform differently than he sees entitlement reform. And I reckon you see spending cuts different than he sees them. So you've got this big gulf. How'd you get through that lunch? What-- when he talked about it, what did you say? When you talked about it, what did he say?

PAUL RYAN: I'm not going to go to the play by play only to say that we had a very candid and frank conversation. But at least we aired out our opinions-- of our own positions and each other's positions. And so having that kind of a candid back and forth I think is helpful. It's constructive. It's a good beginning. But there's no way we're-- you're going to bridge a gap as huge as it is between our positions in an hour and a half.

LARRY KUDLOW: But what about COLAs? What about-- he has come out for COLAs, okay?

PAUL RYAN: It would be nice to see it in his budgets. In the back room, we've heard leaks about-- to this effect, but why don't you actually put a plan out there for the country to see. We've been doing this for year. I think it would be constructive. I think leaders actually make proposals and put them out there for the public to view. And that would be constructive, if he did something like that.

LARRY KUDLOW: All right, he's come out for means testing. You've come out for means testing. So the gap may not be that far. You're going to be in favor of COL-- of different-- cost of living adjustments. What about-- eligibility? What about--

PAUL RYAN: Yeah, all these things are in our budget that you're talking about.

LARRY KUDLOW: And it-- some of these things are things he has talked about. I know he hasn't crusaded on it. But does it give you hope that there is common ground?

PAUL RYAN: Yes. So to your point-- you articulate your views. The other person articulates his views. And after doing that, you find a where is common ground. That's what I think budgeting is all about. We're going to pass our budget. It encapsulates what we believe is the right policy and the right way to go for America, how to grow the economy and revive opportunity, how to prevent a debt crisis. The Senate will pass theirs. The president will have his say. He'll hopefully get around to doing a budget, even though he's-- over a month late. But then you look for common ground. Having a dialogue gets you to looking for common ground.

LARRY KUDLOW: And you of all--

PAUL RYAN: This is a dialogue that's never happened before. So that's why I'm-- I'm cautiously optimistic about this. I hope that we get that. On the tax reform front, though, I would say this. I think the president and his party looks at tax reform as a revenue-generating exercise-- a broader tax base with higher rates, which is just nothing more than a tax increase to fuel spending. We see tax reform differently. I see it-- I subscribe to the Larry Kudlow school, which is--

BOTH: --lower rates, broaden the base--

PAUL RYAN: --grow the economy--

LARRY KUDLOW: --create the incentives, grow the economy.

PAUL RYAN: --economic growth.

LARRY KUDLOW: I buy that.

PAUL RYAN: This is what we believe in.

LARRY KUDLOW: Because this is an austere budget-- in many respects.

PAUL RYAN: I would argue against that. It's a pro-growth budget.

LARRY KUDLOW: But if you-- if you have the tax reform component, it becomes a pro-growth budget.

PAUL RYAN: This is a pro-growth budget. We're having tax reform on businesses on individuals. Knocking those tax rates down to around 25%.

LARRY KUDLOW: Small business too? Tell me small business.

PAUL RYAN: Yes, yes, absolutely.

LARRY KUDLOW: So they go from 40% to even 44%, paying the individual rate, down to 25%? You'll include that?

PAUL RYAN: That is our goal. That's what we're talking about. We're-- you are not going to see House Republicans who represent states like Wisconsin where nine out of ten of our businesses are what we call pass-throughs who file their taxes on the individual side, only lowering the corporate rate and not bringing down the= top rate, which effects our business.

LARRY KUDLOW: All right, so what does Gene Sperling say about that? What does President Obama say about that? You have a gap on tax reform. It's like the gap on entitlements. You say that you would prefer grand design. I'm just trying to figure out what your strategy would be. I have no hope that they're going to ask me in to talk about them. But I've got you. And I'm grateful for it. What's the strategy to close the gap and create the kind of deal that might set the co-- country in a better financial course, a better tax course? You hear this from businessmen, large and small. You hear this from financial people all over the place. "Just give us a deal, some certainty, and we can get over this hump."

PAUL RYAN: Okay, so as long as we've been in the majority, we've been passing budgets. We think that's just a function of governing that's obvious. Here's what we're going to do. We're going to be candid. We're going to be honest. We're going to be forthcoming. We're going to say, "Here's exactly how we think we should fix these problems." The Ways and Means Committee, they're going to pass a tax reform bill.

We're going to say, "Here's how we think we can do a better job on health care reform. Here's how you-- how you do entitlement reform." We're going to pass legislation to do this. Showing the details to the country, making the case. And we hope through that process. We hope that the Senate follows suit. Then you can start talking. But we really believe we should do this in public view.

We call it regular order around here. That means revive the budget process and don't try and cut some backroom deals. Do it so that country can see, so they can look at the ideas that we're talking and laying on the table. And hopefully through that process you can cross-pollenate and get some kind of agreement.

LARRY KUDLOW: So corporate tax reform is on the table?

PAUL RYAN: Yeah.

LARRY KUDLOW: You have essentially accepted the January 1st tax hike. It's in your budget, I assume.

PAUL RYAN: Yeah, it's in the bas-- We're not going to refight the fight.

LARRY KUDLOW: You're not going to refight that.

PAUL RYAN: But the point I would say is we believe we can have a tax reform that hits what we call that revenue line based on the fiscal cliff that still gets us a good pro-growth tax reform, meaning lower rates, broader base. But if you keep asking for static revenue increases, if you keep saying "close loopholes to fuel spending," you're killing tax reform. And we are not interested in killing tax reform. Because we think that's a credible-- essential for growth.

LARRY KUDLOW: But some people have commented-- you want to repeal Obamacare, but you are sort of cherry picking parts of Obamacare. Tell me if this is wrong. The $700 billion reduction in Medicare providers. That's in your budget. You don't want any new revenues, but you are accepting the revenue increase from the January 1st tax hike. So nobody's pluperfect. You're willing to take that in your 10-year balanced budget.

PAUL RYAN: Yeah, so--

LARRY KUDLOW: Is that fair?

PAUL RYAN: So what we do is we stop Obamacare's raid of Medicare, where Obamacare takes money from Medicare to spend on Obamacare. We say, "No, that money stays in Medicare. And it ex-- extends the solvency of Medicare." Then we also have a mechanism. It's a budget mechanism. We call these things "reserve funds." That if we think there's some Medicare providers that are having a problem, that-- that these changes in Obamacare to Medicare providers are denying access, then we need to go address it. Just like we've done with this doctor fix. You know, the S.G.R., we call it the doc fix. That's the same thing. We say, "We need to address these provider problems."

LARRY KUDLOW: So you're putting it in a trust fund? You're putting it back in--

PAUL RYAN: No, we-- no, we have-- we have a budget mechanism that allows us to go into the law-- on a deficit-neutral basis to fix some of these provider problems. So we want to recognize that we think some of these things in Obamacare might damage some of the health care providers. And we want to go and fix those things, just like the doc fix has done. But we're saying all that money from Medicare stays in Medicare. It goes to make Medicare solvent.

The president doesn't do that. He takes this money from Medicare to spend on Obamacare. We end that raid. With respect to the taxes, we know we're not gonna be able to pass into law rescinding the tax cuts-- the tax increases. But we can still get good tax reform at the revenue line we're at. Obamacare hasn't been fully implemented. Obamacare has a lot to go left. There's so much more happening in Obamacare over the next two years that we are saying, "Let's not do all of that. It's going to damage the country. It's going to damage health care."

LARRY KUDLOW: Let me--

PAUL RYAN: "And here's a better way to go."

LARRY KUDLOW: Let me start with that. We're going to have Senator Ted Cruz on the program tonight. And he wants to rescind as much as he can. He wants to defund Obamacare. Are you going to go that route in the House? Can you achieve that in the House?

LARRY KUDLOW: All right-- let me go with you on that. What's the biggest cuts you're going to make right now? What are the largest-- say the three biggest categories of budget reduction in the Ryan budget?

PAUL RYAN: Well, let me give you an Obamacare example. Obamacare expands Medicaid eligibility by a third. We think it's wrong to put 20 million additional people on a program that's already failing, that's already working… Doctors-- more and more physicians aren't even taking Medicaid patients. They're losing money every time a Medicaid patient walks in the door. So why should we throw 20 more million people on a broken system? So we don't do that. That saves right there about $810-$815 mill-- billion over the--

LARRY KUDLOW: So that's the big--

PAUL RYAN: --over the decade.

LARRY KUDLOW: That's the biggest?

PAUL RYAN: So that's a pretty big one right there. There are lots of other things we do. We keep the spending caps going throughout the decade. That saves us some money. We also want to consolidate a lot of our duplicative programs in job training. That saves money. We also want welfare reform.

LARRY KUDLOW: What-- yeah, wait, wait, wait. What about this whole explosion of food stamps? We covered it again last night on our show.

PAUL RYAN: That's right. So--

LARRY KUDLOW: Food stamps are supposed to be counter-cyclical assistance in a recession. We've been out of a recession. I know it's anemic recovery. But presumably the food stamp population should be going down. It's not. It's going up. The government dependency population should be going down. It's not. It's going up. How do you treat that in your budget?

PAUL RYAN: So that's exactly what I was going to say next. The-- we see food stamp reform as part of welfare reform, which is we want to have state flexibility. By sending the program back to the states, having time limits and work requirements, which we're one of the most important reforms that get able-bodied people back on their feet again.

Those reforms that work so well to reduce child poverty to get women who are single families back on their feet again in the late '90s. We want to apply those lessons, those reforms to food stamps, as well. So we see food stamp reform as part of our second wave of welfare reform. And yes, it does save money. Because we're not cranking up a program-- that has gone well beyond its limits. It's grown by 270% over the last decade.

LARRY KUDLOW: How much will it come to? How much will the savings come--

PAUL RYAN: Off the top of my head, I don't know. We will spend $600 billion on food stamps over the next 10 years. Now that's lower than the current baseline. But we will still spend $600 billion on food stamps over the next 10 years.

LARRY KUDLOW: All right, so you're going more or less, so I have this right, what-- over 10 years would have spent $46 trillion. You want to move that down to $41 trillion?

PAUL RYAN: That's right. That's right

LARRY KUDLOW: Is that the-- now underneath that, what's your economic forecast? This is the last quant question. What-- are you-- 3% growth? Is it 4% growth?

PAUL RYAN: It's CBOs. So we don't come up with our own economic forecasts. Our rules require that we use CBO economics. So CBO-- we use all the CBO forecast.

LARRY KUDLOW: Which isactually, it's pretty hefty at 3% to 4%.

PAUL RYAN: Pretty hefty in the short run. Then after 2018, it slows back down. The long run is about 2.6%-2.7% over the long time period. But in the beginning, they think you're going to have a resumption of growth above trend, above 3%. And then after 2018, it goes back down.

LARRY KUDLOW: Can you get spending as a share of G.D.P. (which I really regard as more important than deficit) can you get it back to 20%? Now it has come down.

PAUL RYAN: No, we'll get it back to 19.1%.

LARRY KUDLOW: All right, 19.1%. So it's gone from 25% to 24% to just under 23% this year. So you're saying you're going to get it back to 19.1%. Now--

PAUL RYAN: This is why we balance the budget--

LARRY KUDLOW: Yeah, you know what, it's growth that worries me.

PAUL RYAN: No, I know, but we--

LARRY KUDLOW: Not the budget balance.

PAUL RYAN: We get revenues according to CBO are going to 19.1% in the tenth year. And then we get spending to 19.1%--

LARRY KUDLOW: Don't just--

PAUL RYAN: --tenth year, as well.

LARRY KUDLOW: All right, that's your tax cut also. If you spend less as a share of the economy, this was Milton Friedman. This was Friedrich Hayek. This is Arthur Laffer.

PAUL RYAN: All the guys that studied--

LARRY KUDLOW: --Larry Kudlow. Heaven forbid Steve Moore.

PAUL RYAN: The guys I studied growing up.

LARRY KUDLOW: You lower marginal tax rates, great for growth incentives. But if you lower the spending burden on the economy, that is pro-growth. And that's what you're going for? Is that right? Is that-- is that the message? It's a pro-growth message, not just--

PAUL RYAN: I've been trying to say this to you the whole interview. It's not a means-- balancing the budget is a means to an end. It's not an end in and of itself. And it's a means to a pro-growth economy, faster economic growth, more economic opportunity, a quality of opportunity not a quality of outcome.

LARRY KUDLOW: Last one.

PAUL RYAN: This is our goal is to get people to flourish in their lives, to have upward mobility turn back on, the American dream to be closer within reach of people who have not seen it in a long time. Pro-growth economics means getting this budget under control. Because every big deficit today is just nothing more than tomorrow's tax increase or interest rate increase--

LARRY KUDLOW: All right, I buy--

PAUL RYAN: --stabilizing the situation.

LARRY KUDLOW: I buy-- I hear you. You've made it very clear that you're going to remain as the budget chairman. And-- so people who follow you-- probably like to see that. You've been probably the best budget chairman in quite some time. Last question, for those-- I'm going to come back. For those who want to see a budget compromise and you yourself indicated you wouldn't mind seeing a grand design. What will you give up?

PAUL RYAN: Well--

LARRY KUDLOW: What would you give up in order to get it? In order to get a compromise, what will you give up, Paul Ryan? Last question.

PAUL RYAN: First-- I don't think it's wise-- to negotiate to the media, no offense. Even though you and I have-- long time friends. I don't think it's wise to negotiate to the media. But here's what I think we would have to give up. We cut $4.6 trillion in spending over the next 10 years in our budget. My guess is we will not get that much spending cuts-- over the next 10 years under our budget.

So what does that mean? That means we may not, you know-- get the budget goals we want to achieve, but hopefully we can get a down payment on the problem. We balance the budget and ultimately pay off the debt in our budget. What we hope and what we think the Republican majority is good for, if anything, is to get a down payment on the problem, to delay a debt crisis, to push the bond markets out a few years.

LARRY KUDLOW: What is the down payment?

PAUL RYAN: We'll find out.

LARRY KUDLOW: Will you-- is there a revenue/entitlement down payment? Is there a revenue/entitlement tradeoff? Would you take a revenue increase, however it works, in order to get the entitlement reforms on Medicare/Medicaid that you want?

PAUL RYAN: Well, we think you'll get higher revenues through economic growth. And so if you can measure pro-growth tax reform accurately, based on reality, I think that would get you higher revenues. But-- what they call a static basis, if you just keep chasing static revenue increases, your killing tax reform. We're not going to kill tax reform. I would-- also argue if you open up federal lands-- outer continental shelf for more energy exploration, you'll bring in more revenues. That brings revenues into the federal government.

LARRY KUDLOW: All right, Paul Ry--

PAUL RYAN: Things like that work.

LARRY KUDLOW: Paul Ryan, Chairman of the Budget Committee. Thank you very much.

PAUL RYAN: Thank you, Larry.

LARRY KUDLOW: We appreciate you visiting with us.

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